Thank you for checking out Telos Financial’s Plan for your Purpose financial planning blog for millennials. The purpose of the blog is to introduce financial planning topics I believe are important. I want to start discussions about that will educate, benefit, and improve your financial life. Ultimately, to help you focus on your telos!
The Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law the last week of 2019. With everything going on in the world, it probably didn’t hit your radar, but it may be of importance to you. Especially if you are an investor or have done estate planning.
Here are a few of the changes resulting from this law that I expect to have the broadest effects.
RMD Age Change
Required Minimum Distributions (RMDs), sometimes called Minimum Required Distributions (MRDs), are a built in function of IRAs, 401(K)s, and other qualified retirement accounts. If you have a retirement account and you’re not aware of these, you need to be. If you’re considering saving for retirement, you should be aware of this.
RMDs basically require you to begin taking money out of your pretax accounts at a certain age. You saved money without paying taxes, the IRS says you can’t delay paying forever and they want their tax money. The new change adjusts for increased life expectancy and now requires you to begin taking distributions in the calendar year you attain age 72. Prior to that, it was the year you turn 70 ½, so depending on when your birthday falls, you’ll get another year or two to not pay those taxes.
Not to go too deeply here into RMDs, but they are calculated based on life expectancy. These tables were last updated around 2010 and there is a new proposal to update them, again to reflect current life expectancies. Under the existing tables, the year you turn 72, you have to take a distribution of about 3.9% and the amount increases slightly each year. It will go down slightly under the new proposed tables, but that’s a discussion for another day.
529s and Student Loans
529s are a fantastic tax favored saving vehicle if you plan to continue your education beyond high school. There was a change related to these as part of the recent tax changes and another with the SECURE Act. Prior to these changes, you could only take distributions from 529s for “qualified education expenses” and the IRS has a few pages to help “clarify” what that means, but it basically meant you could pay for reasonable expenses related to education, room, board, tuition, books, etc.
The 2017 tax changes broadened this to allow you to take up to $10,000 per year from a 529 for private school as well. Which, was a welcome change for those that either over saved in their 529 and utilize private school or are planning to go to private school.
The SECURE Act further broadens the scope of 529s use, you can now also use up to $10,000 per year to pay back student loans. I think this is a fantastic and logical change to the rules. It could be really helpful in certain situations.
Do forget to stretch!
Stretching is great, it helps your muscles recover from workouts, improves flexibility, increases blood flow, among other benefits. Stretching an IRA was a great benefit that was eliminated as part of this act. Prior to passage (through 2019), when one inherited an IRA, they could take annual distributions over their lifetime. Why do I care about that? Well, let’s say you inherited an IRA worth $1,000,000 (I know, I know. . .that’s not an everyday occurrence) if you had to take it out of the IRA, just the same as your IRA, it’s taxed as ordinary income. You think your taxes are high now? Imagine your normal income plus the inheritance. You’d be giving up nearly 50% of the account between state and federal taxes (depending on your other income).
When you were able to stretch the IRA, as long as you took at least a minimum amount each year (a moderately complicated calculation based on your life expectancy and that of the deceased) you could take as much or as little (above the minimum) for your lifetime. That allowed you to not only minimize taxes, but to also continue tax deferral, and maintain the asset. Under the new rule, the longest you can draw this out is 10 years. So, for a $1,000,000 IRA (assuming no growth) you could take $100,000 per year for 10 years and manage taxes somewhat, but not nearly as well as before.
This might not affect you, but if you have done estate planning it might. Many trusts have been created to include provisions that counted on the ability to stretch IRAs. This changes that and may necessitate updating your estate documents.
Conclusion
While the new SECURE Act has wide ranging effects and presents the biggest changes to the retirement area since 2006. You should talk with your financial planner, estate planning attorney, and tax professional to see how this may affect you. If you are a DIYer, make sure to fully consider the effects of these changes on your plan.
If you’d like to discuss your financial situation and how the SECURE Act plays into your financial plan, Telos Financial may be able to help you. Contact us today to schedule a free introductory meeting and we can talk more in person. Telos is a financial planning firm serving Michigan’s high income and high net worth millennials, recent college graduates, and small business owners.
Telos Financial is a fee based, holistic financial planning firm located in Plymouth, Michigan serving high income and high net worth young professionals and their families. Dennis LaVoy is a Certified Financial Planner® Designee and a Chartered Life Underwriter®. He founded Telos Financial and to provide fiduciary financial services to families across Michigan including Plymouth, Canton, Ann Arbor, Detroit, and as well as all over the great United States of America.
For more information about the SECURE Act, check out these sites: